Alternative Investment Update – Year-End 2021: Move Fast and Fractionalize
In hindsight, 2021 was another challenging year on many fronts. It was meant to be resolution and relief from the craziness of 2020. But on the ground it just turned out to be an extension of the same. And markets and macro factors reflected this too, driving alternative assets and secondary markets to all time highs.
This was especially so in the second half, as inflation, supply/demand dysfunction and the ongoing pandemic sh*t show continue thrashing the global economy. My alternatives and private investments were, similarly, a hodgepodge mix of hits and misses, and a few happy accidents.
In general, my alternatives and private investments are meant to reflect my sub-strategies and themes. However, these are mostly long duration plays. I like to have a benchmark to measure success (in everything) but I’m less concerned about the real time aggregate performance.
Also, in many cases, I am either still building positions in certain assets, or just doing smaller experiments. So, in contrast to my Year-End 2021 Core Portfolio Investment Update, I will just ramble through individual assets below and will share when I have meaningful data. Hopefully you will find something interesting here and let me know if you do.
Alternatives Goal for 2022
In my core portfolio update I shared a self-improvement list – investing resolutions, if you will. Most of these pertain more directly to more transparent and liquid, public markets. But the one of those that goes directly to this investment segment is:
- Reallocate proceeds from public markets to private and business ventures
This is the start to a larger allocation shift for me that is already in progress (see my current portfolio allocation below). There are some indications below but it will be more obvious in future updates.
|After reading below you can also review my latest investment update. You can also check out my other investment reports.
Alternative Assets and Private Investments
As the year went along I got more active on the alts front. Mostly just went deeper into some instruments that I had previously just dabbled in. I intend to break out into some new areas in the new year, but here is the 2021 second half look-back.
There’s no doubt that, overall, alternative investments crushed it last year. For as good as the equities markets were (despite their late-year weakness), everything on the alts side was on fire.
Real estate was obviously on a rip, and the launch of new collectables markets and fractionalization platforms securitized (effectively or literally) just about everything else. Angel and venture investing is available to more people than ever, thanks to new fundraising platforms and loosening rules. And we can’t ignore NFTs (even if we wanted to) as well as crypto. By any measure, crypto had a great year.
So, I’ll start with that. Based on data from Hedge Fund Research, equity long/short funds posted full-year 2021 performance of +11.9%, under-performing the S&P 500 return of 28.66%. Meanwhile, crypto-focused hedge funds returned 215%. And those killer numbers beat bitcoin (+48.5%), the Bloomberg Galaxy Crypto Index (+153.39%) and the Total Crypto Market Cap (TCAP) index of 2000+ cryptocurrencies, which was up +185% in 2021.
My Crypto Update
Overall, my crypto portfolio (like most everyone else’s) fully recovered in the second half and, as of 11/03 hit a high in real returns of +181.97%. My best % return of the year was back in May, but with all the additions to various positions my basis is all over the place. Given the late Q4 volatility, I ended the year overall +123.97%.
The dips in June, July and September were all buying opps, some of which I took advantage of. But as the year closes my largest holdings and performance outliers are as follows:
|Symbol||Instrument Name||Total % Rtn||Alloc %|
These top 10 holdings constitute 87% of my total crypto portfolio. There are 34 total holdings, so I have lots of starter positions and speculative, long tail plays. I suppose that’s my dabbling nature spilled over from equities.
As noted elsewhere, for me crypto is a very long term investment and I generally don’t have stop loss levels or short term exit plans. As such, and for context, of the 34 total positions, 13 are under water and 12 are up 50% or more. You can see in the table above that the outsized positions are carrying the team (as they should).
Cryptocurrency Position Adds
My crypto activity comes in fits and starts. In early September I added Cardano (ADA) at 2.03 and around the same time I also added to my Avalanche (AVAX) position.
As I often do, I had some ‘would if could’ limit orders to add to positions on various cryptos to take advantage of significant and rapid price drops (which they often do). And later in September there were a few.
…this proved to be the biggest loser of the year. I have since refined my screening and analysis process for crypto.
During the Evergrande dip (on or around Sep 21) I managed to pick up a few bargains. I added more to my Cardano (ADA) position at 2.08, and also added to Polygon (MATIC) at 1.07 and Solana (SOL) at 116.05. Later during the September drop I also initiated a new position, in the Arweave (AR) distributed storage project, at 37.
In October I also initiated a position in SuperRare (RARE) at 1.905. This is the so-called “curation token” issued by the NFT marketplace SuperRare. While the amount was tiny, this proved to be the biggest loser of the year. I have since refined my screening and analysis process for crypto.
In early December we hit another air pocket. I added to my Polkadot (DOT) position at 27.50, as well as to my Cosmos (ATOM) position at 24.50. I started a position in Filecoin (FIL), a decentralized storage network built on IPFS, at $33.10. I also put a speculative bet on alternative smart contract L1 Fantom (FTM) at $1.40.
Yep, I have a sample-sized (just for fun) position in SHIB. Oh, the difference a letter makes.
Annnnnd Shibu Inu (SHIB), that crypto canine queen, also dipped hard on heavy volume to around the 100 day moving average, where I had a resting limit at –355 (so, now underwater). Yep, I have a sample-sized (just for fun) position in SHIB. Oh, the difference a letter makes.
Learn To Love Your Losers
As noted above, there are losers. And the list has continuously changed throughout the year. This is to say that with this volatile asset class, the short term news flow on a given project together with one’s entry price can make a position look like a complete dud.
In fact, it’s usually best to scale into most investments, and these projects generally have big, ambitious goals. This means that growth and success will take time.
Having said that, as of year-end 2021, my top 5 (bottom 5?) biggest percent losers are below.
This is not to say these are all bad projects, but only that the timing of my position initiation was, uhhh, bad (in retrospect).
The one that got away was The Sandbox (SAND). I first tuned into The Sandbox earlier in the year. I like the space and the story a lot. But it was a rocket ship all year (one that left without me). I did catch the MANA wave, with good results. But it’s meta-verse cousin, SAND, has been red hot so I plan to wait for a pullback to saner levels.
BTC Bonus Story
On October 21 there was a brief but shockingly severe drop in Bitcoin, on the Binance Exchange. The price of Bitcoin cratered, dropping around 87%, from around $65,000 down to $8,200.
The current theory is that a very large sell order came in and the exchange matching software did nothing to slow or stop the drop.
But if you had one of those ‘would if could’ limit orders in, far below the market (like at $10,000) then you would have gotten filled. And there are no “busted trades” in crypto land. Alas, I have multiple buy orders resting at much lower levels, but none in bitcoin. 🙁
Real Estate Holdings, Prices Slowing
As noted in my previous update, I made major capital improvements to one property. All reno work was completed in mid-August and a signed lease was in hand less than 1 month later. Adding the regular rental income (generating ~45% yield, net of fixed expenses) has been a great and overdue forward step.
Based on the imperfect estimates of both Zillow and Redfin (averaged across both) my aggregate portfolio value is up ~5% YOY. This might seem surprising based only on headlines, but prices were so hot at the end of 2020 that a relative cooling was inevitable.
And there does appear to be a softening in some real estate prices. There has been reporting on this and I also see anecdotal evidence, at least in the coastal cities I currently have real estate exposure.
For some local comps that I also watch around my properties I currently see cases of recent buyers (2019 and after) being underwater versus their purchase price.
Late last year Fortune gathered a good collection of real estate forecasts that spanned a gamut of outlooks and predictions. With building supply shortages and limited housing inventory, it’s easy to imagine a scenario where prices and the growth rate continue to increase. And, according to the Fortune article, both Goldman Sachs and Zillow do see a continued hot market in 2022, projecting that prices will rise 13.6% between Oct. 2021 and Oct. 2022.
But in sharp contrast, Redfin sees 12-month price growth back down to just 3%, from the double-digit numbers seen at year-end. The chart below illustrates what would be a pretty extreme change in trend.
Having said that, I can see the price growth slowing. For some local comps that I also watch around my properties I currently see cases of recent buyers (2019 and after) being underwater versus their purchase price. Watch this space.
As mentioned in the intro, deploying more capital into private and alternative investments is a primary goal for the year. Based on my current capital allocation, I would like to increase private investments by at last a few points. Whether, which and when I move on any, however, is TBD. It’s apparent from my overall portfolio allocation (see graph below) that more balance is needed (I’m a Libra, after all).
And there are some great signs of continued growth of the private markets, and increased access for smaller investors. The crowd-funding platform, Republic, is itself an example of this. They have dramatically expanded their scope and range of offerings, and their 2021 year-end report reflects this (and industry growth in general).
Reg CF/A+ Investments
I made no new investments in Reg CF or A+, etc offerings in the second half but I have a bunch of things on my radar. Below are two on the short list, currently raising on Republic.
KingsCrowd is a research and data aggregator platform focused on the online private market. It might seem sort of meta that, here in the private investing section, we’re discussing a potential private investment in a fintech company focused on private investing. In the space, they look to be leading, and it’s easy to envision acquisition scenarios.
Inside.com is another digital publishing play, this one with infamous angel investor Jason Calcanis at the helm. Based on the structure and apparent roadmap I am less confident about the end game here, but I love the business and I’m a big fan of JCal.
Private Placement Investment
One of my larger private company equity investments is a digital publishing holding company, in which I participated in the first round. They have engaged an investment bank, in advance of their planned IPO later this year.
Ahead of this they initiated a second round, aimed at funding a final growth spurt ahead of the public offering. The higher offer price represents a 25% internal rate of return on my initial investment. Paper profits are better than none at all. 🙂
It’s a simple idea serving a pretty large sub-segment of digital marketing services space, and with a ton of expansion potential.
Another update worth noting is on an investment that I missed (for now). There is a consumer fintech SaaS that I have been using for over a year. I’ve had an active dialogue with the founder over that time as well. The opportunity to invest also came up recently (I was very interested) and, following an initial meeting, I looped in some friends/potential co-investors. But as I was coordinating things the window abruptly closed due to a pending TBA deal. Grrr! Lesson: Snooze, you lose.
One last note on a previous investment, that of Gumroad. Founder and CEO Sahil Lavingia gave a Q1 update covering revenue (up), creator earnings (up) and $ raised ($100m valuation), and much more. More than the latest stats, what is great about Sahil and his extreme transparency is the insight it gives into this fascinating founder and company. Technically, this dropped in Jan 2022 but better to watch now than later!
Business Experiments & Time Investments
This is my first meaningful update on this front. There are often business buds blossoming in my head but many stay there, and never go further. I’ve now kicked off development on a saas app serving the digital marketing space. It’s a simple idea serving a pretty large sub-segment of digital marketing services space, and with a ton of expansion potential. Coding in progress; more updates to come.
I’ll try to stay on the right side of probabilities, and keep my eyes open to ripe fruit (because something is always in season).
As noted in the Year-End 2021 Core Portfolio Investment Update, I remain alert to corrections and potentially severe downdrafts, and it’s essential that we continue monitoring for and taking action on opportunities.
At the time of publishing (third week Jan 2022) the markets have already started falling, but I suspect this is just the start of a long, healing process. And it will take much longer for the alternative assets to finally take a breather themselves. In the meantime, I’ll try to stay on the right side of probabilities, and keep my eyes open to ripe fruit (because something is always in season).